Palantir Stock Is Down 30% From Its All-Time High. Here's Why It Could Plummet Further.

There were few better stocks to own in 2024 than Palantir (NASDAQ: PLTR). It rose 341% in just a year, and 2025 hasn't been so bad, either. It has risen around 20% so far this year, but at the time of this writing, it is down 30% from its all-time high set just a few weeks ago.

However, I don't think this is a buying opportunity, as this could be the start of an even larger decline. The issue with Palantir's stock has never been the business, as it's a phenomenal company. But there are far too high expectations baked into the stock price, and this pain could get worse before it gets better.

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Palantir has an incredibly strong base business

Palantir's data analytics software has found a strong customer base, including commercial and government clients. This software can best be described as data in and insights out, and it uses artificial intelligence (AI) to help process this data. Clearly, there is a huge demand for AI-powered software applications, and Palantir has risen to the challenge of this new demand.

Palantir's revenue growth has accelerated for multiple quarters in a row on the back of this strong demand, but that could change soon.

PLTR Operating Revenue (Quarterly YoY Growth) data by YCharts

For the first quarter, management expects revenue of $860 million, indicating growth of 35.6%. This is a slight step back from Q4's growth, but it shouldn't concern investors too much, as management has been known to under-guide and over-deliver. Still, for 2025, management expects $3.75 billion in revenue, indicating 31% growth.

Under normal circumstances, I would praise Palantir for its strong growth and growing market share in an important and emerging field. However, Palantir is trading like a stock growing at 300%, not 30%.

The fundamentals don't support the stock's valuation

Even the best companies bought at the wrong price can be disastrous investments, and that's where Palantir is today. Despite its fall, Palantir still trades for an incredible 470 times earnings and 76 times sales.

PLTR PE Ratio data by YCharts

Those are expensive price tags, and Palantir's growth needs to justify them; otherwise, the stock can be overvalued.

So, let's take management's roughly 30% growth rate for 2025 and upgrade it to 35%. Furthermore, let's extend that growth over five years instead of just one (Wall Street analysts only expect 26% growth in 2026). If we do that, Palantir will have revenue of $12.9 billion. That's an impressive rise from today's $2.9 billion figure, but it means nothing if it can't turn them into profits.

Palantir's profit margin has been a bit bumpy but has reached levels of 20% at times.

PLTR Profit Margin (Quarterly) data by YCharts

In five years, this margin will likely have stabilized and maybe have grown. I'll give Palantir the benefit of the doubt and say it can reach a 30% profit margin in five years, placing it among the best software companies out there. If it does that, Palantir will convert its $12.9 billion in revenue into $3.86 billion in profits.

If we divide its current market cap by this figure, we'll get its valuation. Palantir's stock is currently valued at $209 billion, giving it a price-to-earnings (P/E) multiple of 54 in five years. That doesn't sound too bad, but here's the kicker: Palantir's stock price cannot increase one cent from today's level over the next five years to attain this valuation.

That's right; Palantir's stock already has at least five years of growth baked into it. However, the numbers that I used are far beyond what most people (including management) expect, so even in an unrealistic growth case, Palantir's stock will still be expensive five years from now.

It won't take the market long to notice this, and once the music stops playing, it could ignite a huge sell-off of Palantir's stock.

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Keithen Drury has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Palantir Technologies. The Motley Fool has a disclosure policy.